4 ms·
The only reason we'd needed QE in the first place is that we had been printing too little money when the Great Recession happened, and so we let "natural" nomin
by zozbot123 8y ago
The only reason we'd needed QE in the first place is that we had been printing too little money when the Great Recession happened, and so we let "natural" nominal rates drop well below the zero bound. QE is like a "helicopter lift" for nominal rates (the "helicopter" metaphor is one that economists and central bankers use routinely to explain how QE works) - having to resort to it doesn't mean that we're printing too much money, but too little of it.
- abakker 8y agoSure...the gist though is that the central bank responses to any situation with only two tools, interest rate, and money supply. If the situations shows them that there was too little money, they add money. A reason why thy might not have had enough money in the system until QE was that the steady state market equilibrium before the 2008 crash might have genuinely required less cash. There is no law that says that after shocks that the market will always equilibrate to the same place. it is specially the nature of shocks that market conditions are shown to not be in the equilibrium that we assumed they were. You may see signs of one happening, but it is far from clear that you could correctly navigate all policies and market participants to re-equilibriate peacefully.
- AnimalMuppet 8y agoNot quite. The problem was that when the Great Recession happened, $4 trillion disappeared. The Fed responded with QE and created $4 trillion, and we got something approaching stability. The problem was that, before the Great Recession, there was probably too much money, rather than too little. The Fed avoided a deflationary spiral, but now the trick is to drain off the excess slowly and carefully, without breaking anything.